Currently the market is punishing REITs, changing circumstances has put pressure on all types of commercial properties. REITs are seen as geared up assets leveraged to the interest rate cycle. The REITs who are highly geared and exposed to one or two sectors could be in trouble, but I don’t believe this applies to CHC. Charter Hall Group (CHC) gets thrown into this basket too quickly. This isn’t a company that just owns a bunch of offices, or just owns a bunch of shops. Charter Hall Group is a low leveraged, high free cashflow, property fund manager, being thrown out with the bathwater. I think the heavy discounting in the sector is creating opportunity.

What is Charter Hall Group?

I think its more appropriate to view CHC as a funds management business. Charter hall has a fully integrated strategy where it accesses equity, develops properties within its funds or to create new funds, manages these funds, manages the assets via leasing and development services, while retaining equity stakes in all the funds it creates.

In simpler terms, this isn’t a REIT, it is a REIT creator and manager. This allows CHC many levers it can pull to increase FUM and create returns for shareholders.

Putting this in perspective, majority of Charter Hall Groups earnings are from Funds management. Its revenue streams are broken down into below:-

1.     Funds management

This segment collects management and performance fees for all the REITs and Funds the company creates.

2.     Property investment

This segment is the income collected from the stakes it holds in its REITs.

3.     Development income

This segment is the income generated from the development of properties which it then rolls into REITs it manages or to third parties.

4.     Change in Property investment valuation

The company rightly splits out the Operational earnings (which is just the FM + PI + DI) from the Statutory Earnings (which includes the change in property investment valuation). I find this extremely prudent and makes the company easier to value based off the separable parts.  

CHC has low gearing levels compared to REITs across its portfolio averaging 26.9% giving it great flexibility.

21% of the REITs it manages and own stakes in are CPI linked.

Currently CHC has a Free Cashflow yield of 16.8%.

Charter Hall buys 50pc stake in Paradice for $207m

CHC has purchased 50% interest in an equity investment management company Paradice Investment Management (PIM) trying to branch out from its listed real estate portfolio.

The purchase was made at a 10x NPAT multiple. Which isn't super cheap considering like all investment management companies PIM probably had a bumper year in FY21 and NPAT is probably elevated. It is hard to know if the acquisition will be good value or not at this stage. Charter Hall also has the option to acquire the remaining 50% of PIM at the start of FY25.

PIM is a fund manager with $18.2 billion FUM invested in Aussie and global equities.

This is a big side-step for CHC away from their core competency. My initial thoughts are that this does insulate them somewhat to a property downturn but the risks are a big or long bear market in equities.

CHC releasing a second upgraded FY22 guidance within 2 x months.

Initial FY22 guidance given in the FY21 results was for full year OEPS 75c. On November 1st management upgraded to guidance of no less than 83cps. And now OEPS is guided for no less than 105cps.

FUM is also now predicted to be $61.3bn as at 31st of December. Up over 15% in 6 months from $52.3bn at EOFY 21.

This year is turning into a real purple patch for CHC.